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Infrastructure Shortage

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J.M. Albala-Bertrand Department of Economics Queen Mary and Westfield College University of London

Abstract: We propose a method to estimate both whether there is an overall infrastructure shortage and the optimal share of infrastructure in gross fixed capital formation (GFCF). This is based on a two-gap model and linear programming, and is illustrated with the case of Mexico (1950-1985). The results show that Mexico appears to have started with an appropriate share of core infrastructures in GFCF. Then, there would have been an infrastructure shortage up until 1964, and an infrastructure surplus thereafter. It also shows that the optimal coefficient of infrastructure investment-to-optimal output would have been around 4.5 per cent, and that each unit of infrastructure would have optimally supported over three units of GFCF. A macroeconomic shortage does not however mean that there would be a shortage everywhere, but it does imply that the economy as a whole would be in a net state of shortage. So our method may at least provide an appropriate context within which more focused analysis may be attempted.

JEL Classification: E12, 011, 041, O54, C61

Key Words: Infrastructure Shortage, Two-Gap model, Linear Programming, Mexico.

__________________________________________________________________ Contact Address: Dr. J.M. Albala-Bertrand, Lecturer in Development Economics, Department of Economics, Queen Mary and Westfield College, Univ. of London, Mile End Road, London E1 4NS, UK; E-Mail: J.M.Albala-Bertrand@qmw.ac.uk, Tel: 0181 975 5094, Fax: 0181 983 3580.

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Introduction

There is enough evidence that infrastructures are a fundamental contributor to growth and development. However, the issue as to whether an economy undergoes a shortage or a surplus of infrastructures is not so forthcoming. Neither is the issue as to what would be the optimal share of infrastructure in gross fixed capital formation. We propose here an alternative method, based on a two-gap model and linear programming estimations, illustrated with the case of Mexico between 1950 and 1985.

We first introduce the subject via both the importance of infrastructure and the standard assessment of shortages (section 1). Then we introduce the standard two-gap approach (section 2.1), and explain the modifications required for our purpose and present the model structure (section 2 .2). Next, we explain the estimation procedure and the aggregate variables used (section 3). Then the results from the application to Mexico are analysed for two outlooks: the two-gap approach against time (section 4.1) and against the infrastructure coefficient (section 4.2). And finally a short conclusion follows.

1. Infrastructure, Growth and Shortages

Infrastructures play a crucial role in growth and development. Since the 1950s, several academic researchers have indicated that infrastructures, like transport and service networks, and education and health facilities, may represent a pre-condition for growth, as a facilitating type of capital stock for the enhancements of directly

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productive physical and human capitals (e.g. Chenery, 1953; Nurkse, 1954; and especially Hirschman, 1958). Infrastructures or public capital is seen as a complement to directly productive or private capital, normally taking the former as the necessary basis for the latter, i.e. without appropriate infrastructures there are little possibilities of deploying and occupying efficiently productive capacity. Here, infrastructure investment may act not only as a direct complement but also as an inducement for directly productive investment. This came later to represent the crowding-in theses of economic literature, i.e. public investment crowds in, rather than out, private investment, ceteris paribus (Blejer and Khan, 1984; Ortiz and Noriega, 1988; Aschauer, 1988; Barro, 1989; Bacha, 1990; Taylor, 1991). And associated with this, when taking a multisectoral view, it is also conceivable that manufacturing growth may be impaired by a suddenly increased requirement from another sector that competes in the use of the same fix infrastructure capital, in the short and medium term, i.e. by creating a shortage of infrastructures at the expense of manufacturing (Taylor, 1983).

In turn, authors like Aschauer (1989), Aaron (1990), Wickerman (1991), Munnell (1992), and many others, take public infrastructures as an input, whose services enhance the productivity of both physical and human capital. That is, the productive built environment is singled out as another fundamental input in a production function. In addition, the geographic and demographic coverage and quality of service networks, and health and education facilities, have always been considered as a foundation of socio-economic development and as a precondition of economic growth. Indeed, these are normally presented as indicators of development by international agencies and development studies (ECLA; Todaro, 1997). Accordingly,

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While criticising some of the available approaches. the issue as to whether an economy undergoes a shortage or a surplus of infrastructures is not so clear-cut and forthcoming. Ohkawa and Kohama (1989) and Domoto (1992) appear to confirm both the importance of infrastructure capital in economic growth and the potential growth penalties from its shortage. 1997). Gramlich (1994) in turn concentrates on the issue of infrastructure shortage and its evidence in the US. The former allows focusing on the internal rate of return of specific infrastructures. 1989. 1991). Feltenstein and Ha.). 1995). Gramlich. Empirical studies carried for a number of developed countries by many authors. These are useful. 1994. this study also lends support to the importance of infrastructure in economic growth and development. The former by comparing Japan with India allows for some useful generalisation about infrastructures and growth in the process of development. which may indirectly 4 . Examples of the former are localised engineering measures of infrastructure requirement and local voting preferences as regards public works (FHA. 1989. Munnel 1990. However. Some authors have attempted to determine empirically whether there is an infrastructure insufficiency or surplus. As regards economic methods. 1990. and surveys the literature on the issue. the two predominant ones are either cost-benefit analysis or econometric studies (Aschauer.most governments consider repairs and new investments in infrastructures as a strategic foundation for sustained growth and development (World Bank. by using either non-economic techniques or theory-driven economic methods (Ibid. Peterson. World Bank. but largely devoid of institutional or economic meaning. and especially for Japan by Naoki Ono (1987).

in this paper. in the context of macroeconomic accounting. 1993). between foreign and domestic savings. Econometric studies in turn rely theoretically upon either well-behaved production function or cost functions (Berndt and Hansson. econometrics may not be an appropriate technique to establish potential values from empirical data. Aschauer. we propose a macro-level exercise to assess infrastructure shortage (surplus). like those of perfect competition. In addition. Precedents As an extension of the Harrod-Domar model to the open economy (Thirwall. 1992. Given the above considerations. as it has no optimising mechanism. 1994). or at least weak substitutability. 1993. inter-sectoral or general equilibrium repercussions from localised infrastructures are difficult to assess. the two-gap model was devised as an ex-ante analytical framework to assess foreign exchange requirements (Chenery and Bruno.1. which may make them tightly associated with too-strong working assumptions. 1962. which may make the exercise less sound than required. But here the inter-geographic. Therefore. the results are normally validated by theory rather than empirical analysis. Chenery 5 . based theoretically on two-gap models and empirically on linear programming methods. using as an illustration the case of Mexico. McKinnon 1964. Two-Gap Analysis 2. and under the assumption of complementarity. 2. Evans and Karras.be interpreted as an indication of shortage (if this rate is larger than that for the economy).

It attempted to answer whether a country was likely to undergo a potential shortage of foreign savings or exchange. it can be shown that in equilibrium or ex-post. with the help of estimated trends in domestic savings. Or alternatively. some policy-induced structural changes can be attempted so as to generate or attract more foreign exchange inflows in the future. relative to domestic savings (“trade or foreign exchange gap”). relative to foreign savings (“saving gap”). the smaller of the two binds or constrains potential output down. ceteris paribus. Which means that the two differences or gaps may not be equal. or a potential shortage of domestic savings. then only the smaller of the two can be satisfied ex-ante. the foreign aid requirement (to complement domestic savings). One of them for the saving- investment balance and the other for the trade balance.e. But this may not be true ex-ante. In the case of the former. a given amount of foreign savings may produce two different ex-ante valuations for potential output or growth. investors. As the two growth valuations cannot be reached at the same time. there has to be the same difference between imports and exports. for a given level of potential output or growth. If the smaller of the two is the growth valuation 6 . 1966). Meanwhile. at least in the short and medium term. with repercussions for resource usage. representing foreign savings. Therefore. so as to satisfy a given GDP growth rate could then be determined. the required foreign savings to close the saving-investment gap may not necessarily be of the same size as that required to close the trade gap. trade and investment productivity. If this aid (or foreign savings) was unattainable then the growth rate had to be revised down. exporters and importers are normally different agents with fairly independent behaviours. as savers. From aggregate demand accounting. ex-ante. if there is a difference between investment and domestic savings. i.and Strout.

We call the mismatch a gap rather than a disequilibrium. i. the model can be used to assess potential mismatches between the two factors.from the trade balance. A Gap Model to Assess the Infrastructure Gap. as it could address a number of other issues with advantage.2. The conceptual framework of the model has however been rarely used outside the above foreign exchange context. as we want to assess whether there has been a surplus or shortage of infrastructure in the recent past. meaning that it experiences foreign exchange shortage. there are however a few outlook changes from the classic two. for that matter). 2. any time there are at least two complementary factors contributing to given levels of production or growth (or any other given outcome.or threegap models. (a) Assumptions and Outlook In our usage. This means that the gap is associated to institutional structure. Conversely. or indeed to legislation. shortages or surpluses. This thought process will become clearer as we present our actual model below.e. as we assume that this inconsistency cannot be eradicated in the short and medium term by resorting to the “right prices”. we say that the economy is “savings constrained” if domestic resources are not large enough to absorb or use productively the available foreign exchange(1). rather than to market disequilibria alone(2). which is surprising. so we change focus from the generation of savings to actual 7 . First. we say that the economy is “foreign exchange constrained”. the analysis has to be based on actual rather than potential investment. Actually.

e. The complementary assumption. rather than exante. (i) maximum output from available infrastructure capital (Kf). 1997). productive capital) are mutually complementary to each other for production. Then. defined as all types of road networks (including bridges. Second. water. and (ii) maximum output from available productive 8 . i. Third. our model focuses on the supply. they accommodate to satisfy any targeted requirement. utility networks (including communications. tunnels. given this. the problem can be reduced to find the maximum output derived from the actual availability of one type of capital. Felstein and Ha 1995. we can trace back an ex-ante element. assuming that the other is fully available. fully available or passive. Let us also assume that any other requirement for production is constant. Therefore. which may have been affected by the composition of total capital or investment. especially between “core infrastructure” capital and directly productive capital (Munnel 1990. on this count the model becomes and ex-post. and the like. rather than on the demand. oil. Mamatzakis. terminals and the like). side of the economy(3). or herefrom infrastructure capital or infrastructure investment. gas. But as we still want to assess the potential output or growth that was theoretically achievable from actual capital or investment. assuming that productive capital (Kp) is not a constraint or is fully available. sewerage and the like). That is. accounting and analytical framework. i. power generating infrastructures. or at least weak substitutability. Domoto 1992. one type cannot be employed in the absence of the other type. electricity.investment. Let us assume that both infrastructure capital and directly productive capital (herefrom. we do not focus on foreign exchange but on “core infrastructure”.e. is well supported in the literature. contrary to the standard two-gap analysis.

by assuming that the two capitals are in perfect balance at a given base year. If the two types of investment were in equilibrium for production. i. the problem consists in finding (i) the maximum growth from the available infrastructure investment coefficient (If /Y). assuming that the directly productive investment coefficient (Ip/Y) is not a constraint. This means that for a gap 9 . That is. potential production or growth cannot exceed the levels allowed by infrastructure investment. or the two would be mutually binding each other. then there would be no gap between the two.capital (Kp). infrastructure shortage). there could be either potentially more productive investment than the available infrastructure investment can support (i. and (ii) the maximum growth from the available productive investment coefficient (Ip/Y). Therefore. Therefore. whatever the excessive level of productive investment. the above can be transformed into ratios derived from incremental changes. assuming that infrastructure capital (Kf) is not a constraint or is fully available. Given that data on capital stock is not readily available. assuming that the infrastructure investment coefficient (If/Y) is not a constraint.e. there is more of one type of investment than the other type can support or use. or there could be potentially more infrastructure investment than the available productive investment can use (i. production or growth cannot exceed the levels that the lower of the two investments can support or use. infrastructure surplus).e.e. A gap arises only if their mutual requirements do not match. i. and vice versa. and given that it is sometimes more useful to work with growth rates and ratios than absolute numbers. matching their mutually required complements for full-capital employment production.e. That is.

without excess investment. there should be excess investment of one the two types. we have to establish the following: (i) the optimally required ratio or relation between the two investment types for balanced growth. let us assume a fixed-coefficient production function. if useful.to exist. Therefore. Notice that this formulation allows either type of capital to remain idle. this excess remaining idle in production. Kf/kf] (Production Function) (1) Where Ki (i: p or f) are two types of complementary capital. p: productive capital or investment and f: infrastructure capital or investment. which does not need to be true. ki represents the optimal or potential capital-output ratio. Given that actual growth is the outcome of both types of investment (and all other factors) operating in complementary terms. as either capital can only operate productively in complement 10 . but does not change the thrust of the model. and (ii) the maximum or optimal output or growth from one type of investment. (b) The Model Structure For simplicity. as it cannot be supported or used by the other type of investment. but any type of function can be accommodated. Let us also assume that capital or investment is the only limiting factor. given the other. Y = Min [Kp/kp.e. assuming that the ratio or relation between the two is stable over time and scale. from actual aggregate data we cannot directly find either the potential growth rate from productive investment gp or the potential growth rate from infrastructure investment gf. i.

without idle capacity. and therefore remains idle. once one type is fully used. Total capital is: K = Kp + Kf = kpY + kfY = (kp + kf)Y = kY (3) Assuming that the average capital-output ratio is the same as the incremental capitaloutput ratio: k∆Y = (kp + kf)∆Y = ∆K = ∆ Kp + ∆Kf = Ip + If = I (4) Where ∆: variation. this cannot be activated. In equilibrium. which means that if we find empirically the value of this ratio for capital (or investment). the following should hold: Y = Kp/kp = Kf/kf (In equilibrium) (2) Notice that (2) implies that Kp/Kf = kp/kf . in equilibrium the relation between capitals is the same as that between capital-output ratios or average productivities. if there is any remnant of the other.e. I: investment. i. we also should be able to find their average productivity ratio.e. i.with the other. From (4): k = ∆K/∆Y = Ι/∆Y (optimal or potential incremental capital-output ratio) (5) We require also knowing the following ratio: 11 .

And. and vs = I/Y or vs = (Ip/Y) + (If/Y) = vp + vf. 12 . not necessarily behavioural. Therefore. replacing (8) in (9): gf = [(1+ ε)/kY]If or gf = [(1+ ε)/k]vf (10) Where gf = ∆Y/Y is the optimal growth rate that comes from infrastructure investment (we use subindex “f” to refer to this). given that: I = Ip + If (7) Then: I = (1+ ε) If (8) Dividing (5) by Y and rearranging: gs = (1/k)vs (9) Where gs = ∆Y/Y is the optimal growth rate that comes from total investment (we use subindex “s”to refer to this).ε = Ip/If (6) Notice that ε is an optimal technical/structural. relationship. and vf = If/Y.

(1+ε)vf] = (1/k)(vp . Given that total investment includes infrastructure investment. The gap G is equal to 0.e. the value of G represents potential growth rate lost or unattained (in percentage 13 . In turn. This is an alternative and more convenient way to say the same as with the difference between productive and infrastructure investment (see last term of equation (11)). the gap arises every time the composition of total investment is inconsistent with the ε ratio. If so.εvf) (11) Where: > 0 if gs > gf G = 0 if gs = gf < 0 if gs < gf (12) The gap is the result of the difference between the two growth rate valuations: one coming from total investment and another from infrastructure investment. This is the optimal composition or relationship between the two investment types that the economy should keep for mutually bound (or well-matched) growth. i. Only the smaller of the two growth rates is attainable. when vp is equal to εvf. we are consistently back to the investment ratio in equation (6). In other words.gf = (1/k)vs – [(1+ ε)/k]vf = (1/k)[vs . every time G is different from 0. ε = vp/vf = Ip/If. the gap arises when the growth potential from infrastructure investment does not match that of total investment. a quantitative gap can be built as: G = gs .Once (9) and (10) have been estimated.

and (ii) for which infrastructure investment ratios there was an overall shortage (surplus) of infrastructure in the period considered as a whole. while if G < 0 the converse case holds. To search for optimal output from available investment (total and infrastructure. as will be shown later. i. The former accounts for the gap type (i. from the latter we can determine (i) what is the optimal relation between the two types of investment (ε). given a binding investment. That is. From the former we can learn in which years there was a potential shortage (surplus) of infrastructure. or what is equivalent the optimal composition of investment for full utilisation of capital.e. respectively). in equilibrium ε = (β/α) −1. Therefore. The latter in turn accounts for the gap type and its size with respect to the infrastructure investment ratio for the whole period.e. In turn.e. Let α = 1/k and β = (1+ ε)/k. gs = gf).points). for mutually binding constraints. we can find the optimal value of the capital type ratio ε. once the optimal α and β have been estimated. infrastructure shortage or surplus) and its size for every year in the period considered. The latter can also be represented in the customary two-gap graph. if G > 0 then the foregone growth rate is due to a binding shortage of infrastructure investment. at equilibrium (i. This gap can be calculated both against years and against the optimal infrastructure investment ratio vf. For example. 3. we resort to a modification of the linear programming method proposed 14 . Estimation Procedure Our next step is to estimate the parameters of equations (9) and (10).

γ)(t-i) (14) Where the sums Σ move along i: 0. The linear programme seeks to minimise the total gap between potential and actual output. for the whole period. That is. And the base year Y*0. .γ)(t-i) + b Σ Ii-1(i-1)(1 ..γ)Y*t-1 + δt-1I t-1 (13) Where γ is the depreciation rate. and the productivities a and b are the parameters to estimate..by Berg (1984) and applied by Marfan and Artiagoitia (1989) to estimate potential output.γ)tY*0 + a Σ Ii-1(1 . we formulate output of each year as the sum of output in the previous year (minus the capacity-induced output lost to depreciation) plus the addition to output this year coming from the “productivity”(5) of gross investment in the previous year. the asterisk “*” indicates the optimal or potential value of the variable (here output). If. from the data. The linear programme then takes the following shape: 15 . t . provided that actual output is smaller than or equal to potential output in each particular year. this productivity is calculated as the sum of an average component and a linear marginal one. This formulation allows more flexibility than using only an average estimate. That is: Y*t = (1 . as it avoids an overestimation of potential output in the first years. In turn. The first-difference equation derived from (13) is: Y*t = (1 . there is a linear marginal component. To this effect. the programme will pick it. and “t” represents time. δt-1 = a + (t-1)b represents the “productivity” of capital or investment.

a.Minimise: Z = Σ (Y*t .e. the series should be long enough to go across cycles. 1882). to avoid confusion.…. b >= 0 (15) Where the Y*ts are calculated via equation (4). while ignoring the others (Chiang. i. Dervis.γ)(t-i) + b Σ Σ Ii-1(i-1)(1 . But. We use a data set from Mexico for the period 1950 to 1985. Notice that for this method to work. We apply this linear programming model to estimate both optimal base year and productivity parameters for total investment and infrastructure investment.γ)t + a Σ Σ Ii-1(1 .γ)(t-i) . so as to include both peaks and troughs.ΣYt Subject to: Y*t >= Yt Y*0. The debt crisis that started at the end of 1982 makes 16 . we call the parameters c and e.t. but picks the best or optimal combination of values (extreme points). i.e. instead of a and b. contrary to econometrics. it is always possible to test the model by means of sensitivity analysis. 1984. the first sum Σ and also Y*t and Yt move along t: 1. For infrastructure investment. as a second best. We do this by changing the depreciation parameter.Yt) or Z = Y*0 Σ(1 . as this is the only exogenous component in the system. does not smooth trends into average deviations. and the second sum Σ moves along i: 1.n.…. Linear programming. changing marginally some parameters so that the stability of the results can be assessed. The main drawback of the method is that the results cannot be tested with the same statistical sophistication as econometric results.

Proceeding otherwise would produce valid results anyway. 4. Two-Gap Model against Time Assuming depreciation rates of 7 percent for GFCF and 4 percent for Infrastructure Investment(7).less useful to extend the data beyond that point. The Results 4. and c and e to that using Infrastructure Investment. This represents a foreign-exchangeconstrained growth. as a measure of output and total investment we use gross domestic product (GDP) and gross fixed capital formation (GFCF). but the analysis of its causes has to be brought to the fore. but as a result of foreign exchange shortages. This in turn may have significantly affected public investment later (Bacha.78 and e = 0. derived from GFCF. But here the output constraint was not originated by infrastructure investment itself. Tables 1 and 2 below show 17 . We are however trying to assess the impact of infrastructure shortages (surplus) when other variables are not strongly influencing this result. b = 0.97. Where a and b belong to the calculation using GFCF. a = 0. the linear programme produces the following estimated values for the model: Y*0 = 124779.14. respectively. Lastly. as output fell significantly on account of the drying up of foreign capital inflows. While the programme does not pick a linear marginal productivity change (b) for GFCF over the period.1. 1991). And as a measure of “core infrastructure” we use a series. c = 1. especially built up for the purpose(6). it does do so for Infrastructure Investment (e).

[1] Y*s-Y Actual Gap 0 0 8080 21193 19252 18380 21236 25066 33623 43669 42416 50409 57814 56304 46812 56356 63622 74883 82438 98666 113250 141487 145358 153110 179355 211055 255550 300990 303183 307471 333119 373628 505076 611048 653379 736008 [5] [3] . Investment) [6]: Y*s-Y*f (Optimal Gap or Two Gaps) [7]: Lower Y* (Feasible Optimum: Lower of Y*s and Y*f) [8]:Y*-Y (Feasible Gap.[1] Y* Y*-Y Feasible Feasible Optimum Gap 124779 0 139336 4907 151743 11968 162022 21864 173420 19252 185650 18380 199942 21236 217309 25066 236090 33623 252192 43669 267864 42416 286971 50409 305429 57814 323700 56304 345474 46812 374386 56356 403696 63622 436230 74883 473237 82438 514178 98666 557521 113250 604291 141487 647444 145358 697417 153110 756923 179355 821031 211055 891381 255550 958712 300990 1015165 303183 1084634 307471 1176080 334225 1333937 425172 1508140 604306 1639078 751431 1711767 825839 1777509 929250 [9] [8]/[7] % Feasible Gap 0 4 8 13 11 10 11 12 14 17 16 18 19 17 14 15 16 17 17 19 20 23 22 22 24 26 29 31 30 28 28 32 40 46 48 52 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Note [1]: Y (Actual Output). [3]: Y*f (Optimal Ouput from Infrastructure Investment). [5]: Y*f-Y (Actual Gap from Infr.[1] Y*f-Y Actual Gap 0 4907 11968 21864 17983 16059 14015 8177 7380 11943 6503 8436 16307 13543 0 2753 5603 15919 18570 30589 33365 49314 43458 49195 75623 100900 152930 199669 223083 269428 334225 425172 604306 751431 825839 929250 [6] [2] .[3] Y*s-Y*f Optimal Two-Gap 0 -4907 -3412 96 1917 2738 7598 17539 27158 32238 35788 41604 40577 41055 44714 51997 56581 57833 63330 68258 80616 93426 102504 104461 105115 112315 105706 103939 79756 36303 -1709 -49506 -93040 -137639 -181733 -213503 d:7% for GFCF. amount) [9]: 100(Y*-Y)/Y* (Feasible Gap. [2]: Y*s (Optimal Output from Total Investment). percent) d: Depreciation 18 .TABLE 1: OPTIMAL TWO-GAP IN ABSOLUTE NUMBERS (Whole) [1] xxx Y Actual Output 124779 134429 139775 140158 154168 167270 178706 192243 202467 208523 225448 236562 247615 267396 298662 318030 340074 361347 390799 415512 444271 462804 502086 544307 577568 609976 635831 657722 711982 777163 841855 908765 903834 887647 885928 848259 [2] xxx Y*s Optimal Output 124779 134429 148331 162117 174069 186067 200320 217959 237005 252705 267739 286602 304499 321995 343376 372780 402259 435099 472699 514359 558252 605544 648047 697963 758305 823191 894467 961330 1014821 1082894 1174370 1284431 1415100 1501439 1530034 1564006 [3] xxx Y*f Optimal Output 124779 139336 151743 162022 172151 183329 192721 200420 209847 220466 231951 244998 263922 280939 298662 320783 345677 377266 409369 446101 477636 512118 545544 593502 653191 710876 788761 857391 935065 1046591 1176080 1333937 1508140 1639078 1711767 1777509 [4] [2] . d:4% for INFR [7] [8] Y*s or Y*f [7] . [4]: Y*s-Y (Actual Gap From GFCF).

percent) d: Depreciation 19 .[1] Y*f-Y Actual Gap 0 4 10 18 14 13 11 7 6 10 5 7 13 11 0 2 4 13 15 25 27 40 35 39 61 81 123 160 179 216 268 341 484 602 662 745 d:7% for GFCF. Investment) [6]: Y*s-Y*f (Optimal Gap or Two Gaps) [7]: Lower Y* (Feasible Optimum: Lower of Y*s and Y*f) [8]:Y*-Y (Feasible Gap. [2]: Y*s (Optimal Output from Total Investment). [4]: Y*s-Y (Actual Gap From GFCF).TABLE 2: OPTIMAL TWO-GAP IN INDEX NUMBERS (Whole) [1] xxx Y Actual Output 100 108 112 112 124 134 143 154 162 167 181 190 198 214 239 255 273 290 313 333 356 371 402 436 463 489 510 527 571 623 675 728 724 711 710 680 [2] xxx Y*s Optimal Output 100 108 119 130 140 149 161 175 190 203 215 230 244 258 275 299 322 349 379 412 447 485 519 559 608 660 717 770 813 868 941 1029 1134 1203 1226 1253 [3] xxx Y*f Optimal Output 100 112 122 130 138 147 154 161 168 177 186 196 212 225 239 257 277 302 328 358 383 410 437 476 523 570 632 687 749 839 943 1069 1209 1314 1372 1425 [4] [2] .[1] Y*s-Y Actual Gap 0 0 7 18 16 15 17 21 28 35 34 40 46 44 36 44 50 59 66 79 91 114 117 123 145 171 207 243 243 245 266 301 410 492 516 574 [5] [3] . [3]: Y*f (Optimal Ouput from Infrastructure Investment).[1] Y*s-Y*f Y* Y*-Y Optimal Feasible Feasible Gap Optimum Gap 0 100 0 -4 112 4 -3 122 10 0 130 18 2 139 15 2 149 15 6 160 17 14 174 20 22 189 27 26 202 35 29 215 34 33 230 40 33 245 46 33 259 45 36 277 38 42 300 45 45 324 51 46 350 60 51 379 66 55 412 79 65 447 91 75 484 113 82 519 116 84 559 123 84 607 144 90 658 169 85 714 205 83 768 241 64 814 243 29 869 246 -1 943 268 -40 1069 341 -75 1209 484 -110 1314 602 -146 1372 662 -171 1425 745 [9] [8]/[7] % Feasible Gap 0 4 8 13 11 10 11 12 14 17 16 18 19 17 14 15 16 17 17 19 20 23 22 22 24 26 29 31 30 28 28 32 40 46 48 52 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Note [1]: Y (Actual Output). amount) [9]: 100(Y*-Y)/Y* (Feasible Gap.[3] Y*s or Y*f [7] . [5]: Y*f-Y (Actual Gap from Infr. d:4% for INFR [6] [7] [8] [2] .

when the optimal gap is negative. Column 4 and 5 show the respective gaps between the two optimal GDP valuations and actual GDP.e. while all the others have been generated using the values from the optimisation exercise. 1997). Finally columns 8 and 9 account for the amount and percentage of actual feasible gap. the binding gap or constraint is Infrastructure Investment. column 3 shows the optimal GDP from infrastructures (assuming accommodating GFCF). i. as it represents the maximum constrained growth. i. Column 7. Oxford. Each table shows eight different columns. World Bank World Development Report 1997 (OUP.e. as there would be surplus of Infrastructure Investment (or a surplus in the share of infrastructure investment in GFCF). When the optimal gap entry has a negative sign. This represents the results for our two-gap model with respect to time. over time. in turn. the optimal GDP from GFCF is used and vice versa. 20 . The latter implies a shortage of the noninfrastructure component of GFCF. respectively. as there would be a shortage of Infrastructure Investment (or a shortage in the share of infrastructure investment in GFCF). And when the optimal gap entry is positive. we call it “feasible output” or feasible GDP. Column 6 is our main aim: it shows the gap between the two optimal valuations of GDP. The first one is the actual GDP. Given that only the smaller of the two is feasible. Columns 2 shows the optimal GDP coming from GFCF (assuming accommodating infrastructures). Y*s-Y*f. has been built by taking the smaller of the two optimal GDP valuations.the same results in absolute quantities and as index numbers. The gap represents the maximum foregone output due to either a shortage of core infrastructure or a shortage of GFCF. the binding gap or constraint is GFCF.

for reasons other than infrastructure or productive investment shortages. e. which becomes more prominent towards the end of the period. GDP started to fall from 1982 onwards. due to the debt crisis (Williamson. This is not surprising as while infrastructure investments increased its share in GFCF (from 1978–1983). 21 . the difference representing feasible foregone GDP. For scaling convenience we use the index numbers rather than the absolute values. capital flights. The difference between the two curves represents optimal foregone GDP. there appears to have been an infrastructure surplus. It can also be seen that the foregone optimal output due to shortages of productive investment is significantly larger than that due to shortages of infrastructures. as expected. but this is fully equivalent. Graph 1 below represents this story.respectively. 1990). inflation. balance of payments problems. are the same at the beginning. Here the actual output and the two optimal outputs are depicted against time. From here. then the former is slightly above the latter up until they cross each other in 1965. is always below the smaller of the two optimal outputs. i. there would have been a shortage of infrastructures up until 1964. or Y*s. This represents the maximum foregone output at any one time.g. The curves show that the optimal output from GFCF. the composition of GFCF was about right.e. and the like. or Y*f. political instability. And from this year onwards.(8) Concentrating on the Optimal Gap (column 6). Then Y*f is on top of Y*s and the gap rapidly diverges. the results tell us that at the very beginning of the period there appears to have been a well-matched combination of infrastructure and productive investment. and the optimal output from infrastructure. The actual output Y.

GRAPH 1: TWO-GAP OUTPUT (INDEX) 3500 3000 2500 Output 2000 1500 1000 500 0 72 78 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 Years Optimal Output Y*s Optimal Output Y*f Actual Output Y 22 19 84 50 52 54 56 58 60 62 64 66 68 70 74 76 80 82 .

Equations (9).e. In turn. so as to allow for the depreciation γ. equation (10). they are calculated with respect to optimal. expressed in terms of vf. vs can be decomposed into vp + vf. vf.)t-1/Y*t-1. we can drop the 23 . a = 0. i.2. i. respectively. and the coefficient δ represents either α = a or β = c. and c = 2. As we calculated this by taking the whole period as a unit. That is. Two-Gap Model against Infrastructure Coefficient To establish what would be the optimal infrastructure coefficient. the investment coefficients are calculated as vt-1 = (GFCF or Infr. only the parameter “c” changes. The results from this exercise are(9): Y*0 = 124779.4. allow us to have a solution system for growth against infrastructure investment. However. assuming only average productivity parameters for the whole period.97. dividing both sides by Y*t-1. we drop the linear marginal parameters b and e from the model. and then subtracting one from both sides: g*t = -γ + δt-1vt-1 (16) Where γ is the depreciation rate (which can vary according to the type of investment). and the value for ε. as gs = (1/k)vp + (1/k)vf. first. That is. GDP or output. while the latter would give us that derived from infrastructure investment (g*f). whether vt-1 is the GFCF or the Infrastructure Investment coefficient. For GFCF. the optimal average productivity of Infrastructure Investment. Inv. The former would give us the optimal growth rate derived from total GFCF (g*s). and the optimal capital ratio ε for the whole period.37. we have to re-calculate the linear programme. we transform equation (13) into growth rates by.e. rather than actual.

subindex “t”. when the two optimal growth equations are equalised.5 percent of optimal GDP. I recall that α = a and β = c.1. And as expected. and that actual growth is on or below the feasible points (lower sections of the two curves)(10). the calculation of ε = (Ip/If) becomes: ε = [(γ1-γ2)/avf] + (c/a) – 1.4). for the period as a whole. to calculate the optimal ratio between capitals. Therefore. It shows that the two curves cross at the system solution points. at optimum. Or what is equivalent. This system solves for growth g = 7. there will be a mutual constraint (or wellmatched relationship between investments) when “core infrastructure” investment represents 4. we then take the value of vp. we have two equations and two unknowns: g* and vf.5. at optimal values. one unit of core infrastructure can sustain slightly over two units of directly productive capital. around 1980 (vp = 9.4 and infrastructure investment vf = 4.5. ε. For consistency. Therefore. it also shows that there would be an infrastructure binding constraint on growth (or infrastructure shortage) any time the infrastructure investment ratio is smaller than 4. This would constitute a technical/structural optimal relationship for the period(11). and assuming different depreciation rates. 24 . γ1 and γ2 (for g*s and g*f. respectively). That is. one unit of infrastructure can support slightly over three units of GFCF. and vice versa for values over this point. when the optimal gap (in this estimation) equals zero. So for the period as a whole. using (16). The result is ε = 2. Graph 2 below represents the system in a more customary two-gap graph. In turn.

5 3 3.5 8 8.5 2 2.5 4 4.5 6 6.GRAPH 2: TWO-GAP GROWTH RATES 20 15 Gr 10 o wt 5 h Ra te 0 0 -5 -10 Infrast Coeff Vf optimal growth rate g*s optimal growth rate g*f actual growth rate g 0.5 7 7.5 1 1.5 25 .5 5 5.

i. which becomes more prominent towards the end of the period.e. i. Not less useful. the composition of GFCF was about right. there would have been a shortage of infrastructure. what is equivalent. there appears to have been an infrastructure surplus. It also shows that actual output would normally be below the feasible optimal output on account of other standard economic and political determinants. Mexico appears to have started with an appropriate share of core infrastructures in total gross fixed capital formation (GFCF). the results against infrastructure investment showed that the coefficient of infrastructure investment to optimal output. Under this average value. The case of Mexico was used as an illustration for our two complementary outlooks. and vice versa.5 per cent. would be around 4.Conclusion We have shown that an assessment method derived from a two-gap framework. In turn. may tackle the issue of shortage (surplus) of infrastructure at the macroeconomic level with some advantage. it appears that each unit of infrastructure could optimally support over three units of GFCF or. there would have been a shortage of infrastructures up until 1964. The results show that during the sampled period (1950-1985). From here. over two units of non-infrastructure or “productive” investment. And from this year onwards. 26 . at optimal levels.e. for the period as a whole. and applied via linear programming. partly on account of the 1982 debt crisis. shortage (surplus) both against time and against infrastructure investment.

more focussed analysis can be resorted to discriminating between geographic locations. and infrastructure components.It is true however that if an economy undergoes a macroeconomic shortage (surplus) of infrastructures. 27 . economic sectors. that does not necessarily imply that there would be a shortage (surplus) everywhere. then once this shortage (surplus) has been established. So our method may at least provide an appropriate context within which other analysis may be attempted. but it does imply that the economy as a whole would be in a net state of shortage (surplus). Assuming that our method has a useful contribution at this level.

especially those for infrastructure purposes. as it keeps changing overtime (as the institutional structure changes). 1991. as an accounting model to inform decision making on foreign loans.NOTES (1) The easy credit to developing countries from 1973 until early 1980s virtually eradicated this model from the economic literature. the model was extended to deal with the so-called “fiscal gap”. 1995). as governments were forced to serve the debt. allowing a more clearly empirical understanding of them. 28 . Khan et al. But. 1984 and 1990. a third valuation for ex-ante output or growth. the World Bank has always used it for its growth programming exercises of member countries. Since then the model is resorted to from time to time in academic literature to analyse constrained growth (Bacha. (2) For example. accounted by idle capacity (Ormerod.e. i. and others). all that is required is (i) to focus on the generation of savings. Given that there was now a serious fiscal constraint. Taylor. just as with the difference between potential and actual output. and (ii) to take the potential level of savings as the maximum achievable investment. 1987. These could be called “employment gap” and “capacity gap”. respectively. In this case. the so-called “natural” rate of unemployment may be a structural phenomenon. but it came back with renewed strength after the 1982 Mexico moratorium that heralded the world debt crisis. Fanelli and Frankel 1989. 1989. (3) It should be pointed out that the standard. demand-determined model can still be entertained for policy analysis. whether in its original form or a modified version of it (Michalopoulos. ex-ante. 1990). Eyzaguirre.

To test the sensitivity of the linear programming model. we use Non-Infrastructure Investment as a measure of “Productive Investment”. and all of them are calculated in constant 1970 million pesos. the coefficient is not actually the productive capacity of capital alone. who is writing a PhD thesis on the subject at the LSE. The other series come from INEGI (1990. it can be corrected. we attribute total output to total capital. (6) The “core infrastructure” series was kindly supplied by Ernesto Piedras.(4) Berg (1984) used it to estimate potential or capacity output in various manufacturing sectors. The method may overestimate capacity in some heterogeneous sectors. appear as acceptable values. this productivity is bound to be a lot larger than the marginal productivity of capital alone. by making explicit all factor contributions (see Thirwall 1994). but the results appear to be strongly correlated with actual plant information. we actually tried some 29 . In turn. i. 1994). just as the calculation of average productivity of labour via the outputlabour coefficient. In turn. Therefore. As with the capital-output ratio. but an assumedly stable ratio. This then assumes that capital is the pivotal contributor. Marfan and Artiagoitia (1989) used it for macroeconomic analysis and it appeared to have a fairly good analytical and predicting value. but total output is the result of many other factors contributing to it. as a simplifying assumption.e. That is. (5) Notice that this “productivity” represents the ratio of total output (or addition to output) to total capital (or investment). respectively. This allows us to assess the share of Infrastructure Investment in total GFCF. (7) Depreciation rates of 7 and 4 per cent. while all other factors adapt to its requirements.

and infrastructure surplus thereafter. (10) The actual values have been calculated by averaging the actual growth rates for similar infrastructure coefficients. (9) For this case. The size of the gap may however increase in some calculations. five.combinations with zero. as they are not relevant.e. it can also be used as a behavioural relationship to analyse both investment inducement and crowding-in effects. Taylor 1991). but can be requested from the author if required. as economies normally operate with a level of unemployment and idle capacity due to diverse structural causes (Taylor 1991). The pattern was similar: no gap at the beginning. i. the graph was drawn by joining the calculated points with straight lines. infrastructure shortage for part of the period afterwards. three. but the overall pattern remains. however. In most cases the crossing year was around 1965. public investment (in core infrastructure) encourages private productive investment (Bacha 1990. In turn. (11) Under certain assumptions. (8) Assuming that the feasible output is an accurate quantification of (constrained) potential GDP. increasing strongly towards the end of the series. the tables against years are not included. 30 . then the actually foregone GDP should be smaller than the simple difference between this and the actual output. and seven percent.

et al. in NBER Working Papers (No. 31 .. 1984). 1897). “Why is Infrastructure Important? Discussion” in Munnell (1990). Aaron. M. 1984). Aschauer. 56.) Growth-Oriented Adjustment Programs (IMF. and Strout. and Government”. 1989). “Growth with Limited Supplies of Foreign Exchange: A Reappraisal of the Two-Gap Model”. D.BIBLIOGRAPHY Aschauer. 57. E. Chenery. H. 3842. 1953). Bacha. “Does Public Capital Crowd Out Private Capital?” in Federal Reserve Bank of Chicago. “The Application of Investment Criteria” in Quarterly Journal of Economics (No. 1962-81”. E. et al. No. Combo. 279-296. Was. D. 1982). (Eds. R. E. M. Savings. 1990). 57. “Development Alternatives in an Open Economy: The Case of Israel”.. “Government Policy and Private Investment in Developing Countries” in IMF Staff Papers (31. “A Cross-Country Study of Growth. “Estimation of Production Capacities in Putty-Clay Production Model: Norwegian Manufacturing Industries. 177-200. V. Chenery. “Is Public Investment Productive” in Journal of Monetary Economics (23. in Economic Journal (Vol. in Scandinavian Journal of Economics (Vol.A. 1984). D. 1993. Fundamental Methods of Mathematical Economics (McGraw Hill. M.2. D. 2855. Barro. No. “Public Capital. Sweden. 1988).A. B.A. Berg. Blejer. Chenery.. 1966). Chiang. A. and Bruno. Bacha. Memorandum 88-10. H. 79. No. 3rd Edition. in American Economic Review (No. H. “Foreign Assistance and Economic Development”. A. in Syrquin (1984)..C. Aschauer. Cambridge. K. 86. Dervis. General Equilibrium Models for Development Policy (CUP. 379-403. 1991). 1962). “Measuring the Contribution of Public Infrastructure Capital in Sweden” in NBER Working Paper (No. Productivity and Economic Growth” in Jonkoping Working Paper. 3. and Khan. 1989). H.A. and Hanson. Bernt.“A Three-Gap Model of Foreign Transfers and the GDP Growth Rate of Developing Countries” in Journal of Development Economics (32.. S.

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